A buying frenzy is reemerging in Canada after one of the steepest housing price declines in the nation’s history. In Toronto, properties are selling the day they hit the market. In Vancouver, lines for open houses are stretching down the block. Homes are now once again selling for hundreds of thousands of dollars over asking.
The mystery is where the money is coming from.
Despite what was a nearly 16 per cent drop in home prices over 11 months, Canadian housing is the least affordable it’s been in more than four decades, according to Oxford Economics. That’s because mortgage rates rose at a faster clip than prices fell last year, leaving most gauges economists use to measure affordability worse instead of better. So how are buyers bridging that gap? It may be that they’re getting help from their parents.
“The bank of mom and dad is a factor in the majority of transactions,” Jonathan Cooper, president of Vancouver-based brokerage Macdonald Real Estate Group, said of the first-time home buyers in today’s market. “We’re in the midst of an unprecedented transfer of wealth.”
Roughly two-thirds of Canadians own homes, and after a 553 per cent rise in home prices over 25 years, many have built up substantial equity. Combined with the extra savings many households amassed during the pandemic, it’s created a large pool of capital waiting to be passed down to the next generation.
Though there is no current data on the extent of financial help homebuyers are receiving, research from Canadian Imperial Bank of Commerce in late 2021 showed 30 per cent of first-time buyers were, with the average gift rising along with home prices to $82,000.
Gifts are likely playing an even larger role in the market today to help bridge the affordability gap opened by higher interest rates, said Benjamin Tal, the economist who authored the report.
“I would be very surprised if we’re not seeing a significant amount of gifting,” he said, adding that the approximately $300 billion in extra savings Canadians built up through the pandemic are likely swelling both the size and prevalence of gifted down payments.
By 2019, the baby boomer generation already had an average net worth of $1.2 million, according to Statistics Canada data. And that would have swelled thanks to the pandemic surge in home values, which last year’s decline has not entirely erased. Meanwhile, their buying power has been insulated from the near doubling of interest rates over the last year because many already paid off their mortgages.
For instance, a baby boomer downsizing from a four-bedroom home to a condo could pay for their purchase in cash, and then help their adult child get something bigger themselves — all without ever having to call a bank. The CIBC report from 2021 showed 9 per cent of move-up buyers — those purchasing a bigger house rather than their first — received family help too.
“I’m seeing people even in their 40s getting help from mom and dad,” said Mike Majeski, a real estate broker in Toronto. “If you’ve owned your property for 10 years or more, rates could be 9 per cent, you still have a tremendous amount of equity.”
With prices on the rise again — the benchmark price of a home in Canada rose 1.6 per cent in April — the question is what happens to the people whose families don’t have home equity to tap into? Canadian banks generally won’t lend more than five times a borrowers’ income, but home prices in the country are about seven times the average, according to a January report from the Bank of Nova Scotia.
That gap could consign many people to renting for much longer — or even permanently. That would exclude them from one of the traditional routes to middle class security in Canada, and make their access to housing more precarious. In 2021, over a fifth of Canadians exceeded the threshold the government uses to determine whether they can afford the housing they need, the same Bank of Nova Scotia report found. But among renters, who have no hope of reducing their monthly shelter costs by gradually paying down their mortgages, that rate rose to a third.
As baby boomers continue to age, the intergenerational capital flow could only be getting started — spurring values higher still, and property further out of reach for strained renters.
“It’s unbelievably competitive, homes are selling quickly,” said John Pasalis, a broker in Toronto. “It seems like capital just keeps on flowing into the housing market.”
Rachel St-Pierre, a 26-year old emergency room nurse who’s been trying to buy a one-bedroom condo near her work in Montreal, has found herself sidelined by that capital flow. She’s saved up $80,000 for a down payment, and her $120,000 in annual income is enough for a $550,000 mortgage. But without any family help, she's been outbid on the three places she recently made offers on, by $60,000, $80,000, and finally $100,000.
“I can't compete,” she said. “The math doesn't work out.”